Google crackdown on lending apps may raise competitive heat for NBFCs

The move may push many digital lenders to apply for NBFC licences. While the crowded retail lending segment faces overleveraging risk with the entry of more players, the MSME space stands to benefit.

Global tech giant Google’s action against digital lending mobile apps on its Play Store may create more competition for non-banking financial companies (NBFCs), said experts.

Recently, Google said that it has taken necessary enforcement action against more than 3,500 personal loan apps in 2022, which includes removing them from the Store for violating its policy requirements. The tech major has also revamped its guidelines for digital lenders under which these apps cannot access personal and other sensitive details of users.

Going ahead, experts said that these digital lenders will opt for an NBFC licence with the Reserve Bank of India (RBI).

“More digital lenders are expected to approach the RBI for an NBFC registration certificate as Google's policies for hosting lending applications on its Play Store will tighten further,” said Ram Rastogi, Chairman of Fintech Association for Consumer Empowerment (FACE).

“Some serious players would go for NBFC licences after the actions by Google,” said Shachindra Nath, Vice Chairman and Managing Director, U Gro Capital.

Actions against lenders

The tech giant, in a bid to crack down on unregistered and fraudulent lenders, in the past two years, has taken strict actions on digital lending apps.

In August 2022, Google blocked 2,000 personal loan providers from its app marketplace in India. The company’s actions include app rejection, suspension, restricting the discoverability of the app, making it available only in certain regions and even terminating the developer account of the app maker.

In 2021, Google revised its Play Store developer program policy for financial services apps, mandating additional requirements for personal loan apps in the country.

The rise in digital lending by unregistered and fraudulent apps has been a major concern that has had the government, RBI as well as the Enforcement Directorate (ED) in a bind. The issue dates back to 2020 when instances of high-handed loan recovery methods by these apps that lend to unsuspecting customers at high rates pushed many to commit suicide.

Experts highlighted that the RBI has time and again warned digital lenders to work on their lending business under its digital guidelines.

“The central bank has made it clear for lending apps to adhere to and work under its guidelines. Those lenders who wish to explore services other than lending need to apply for a licence so that proper regulation takes place,” said Aditya Kumar, CEO and Co Founder of Niro.

Also read: Alternative funding, tech-friendly and personalised services to boost digital lending, say experts

What about competition?

The lending market in India grew 11.1 percent to Rs 174.3 lakh crore as of March 2022, as compared to the previous fiscal year, credit bureau CRIF High Mark said in the second edition of its report, ‘How India Lends’.

The report mentioned that NBFCs and other digital lenders dominated major sectors like home and microfinance loans, credit cards, business and consumer loans, two-wheeler loans and retail loans whereas traditional banks dominated the commercial loans sector.

Sovan Satyaprakash, Head, Strategy, Aye Finance, said with the entry of new players in the NBFC market, the crowded retail lending segment will see increased competition going ahead. “The new entrants also pose a risk of overleveraging eligible borrowers or increasing subprime lending, while the MSME lending space could stand to benefit,” he added.

Alongside this, some experts said that many digital lenders still have business in collaboration with NBFCs and fintech firms, which will coexist despite some lenders applying for the NBFC licence.

“In the last five years, co-lending by digital lenders, NBFCs and legacy banks has increased. This is a business model which exists other than the competition arena,” Kumar said.

NBFC licences

Recently, some digital lenders and fintech companies secured NBFC licences from the central bank.

On May 4, alternative financing fintech platform Getvantage got an NBFC licence. Last month the neobanking platform Jupiter secured an NBFC licence to enter the lending business.

Also read: RBI has sent a list of digital lending apps to government: Shaktikanta Das

With the possibility of entry of new players in the NBFC market, experts highlighted that entrants in the sector will create a diverse market for consumers.

“The entry of more players through NBFC licences could have different degrees of impact on different segments. With more players in MSME lending, the industry as a whole will be better able to cater to the needs of the largely underserved market of micro-enterprises,” said Satyaprakash.

“Owning an NBFC licence will give digital lenders a competitive edge over other players in the market, as it will enable them to provide a wider range of financial services to their customers,” said HP Singh, Chairman and Managing Director, Satin Creditcare Network.

Earlier, RBI had said that digital lenders must convey the details of the recovery agent if a loan turns delinquent.

"If the loan turns delinquent and the recovery agent has been assigned to the borrower, the particulars of such recovery agent assigned must be communicated to the borrower through email/SMS before the recovery agent contacts the borrower for recovery," the RBI said in an FAQ on digital lending guidelines.

Here, experts highlighted that digital lenders who have NBFC licences fall under the regulatory purview of the central bank which can help in better regulation.

Singh said, “Digital lenders have been rapidly gaining market share in the loan industry. In addition, the regulatory supervision provided by the RBI may enhance transparency and responsibility in the industry, thereby helping to level the playing field for all participants.”

Also read: RBI wants IT ministry to ensure only regulated digital lenders on app stores: FinMin

On the other hand, Nath said the fundamental nature of the business model of these digital lending apps did not have any regulation or regulatory aspect.

Here, Singh said, this will entirely depend on how well each company is able to adapt to the changing landscape and offer unique value propositions to stay competitive.